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Working Paper

Evaluating the Information Value for Measures of Systemic Conditions

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Timely identification of coincident systemic conditions and forward-looking capacity to anticipate adverse developments are critical for macroprudential policy. Despite clear recognition of these factors in literature, an evaluation methodology and empirical tests for the information value of coincident measures are lacking. This paper provides a twofold contribution to the literature: (i) a general-purpose evaluation framework for assessing information value for measures of systemic conditions, and (ii) an empirical assessment of the information value for several alternative measures of US systemic conditions. We find substantial differences among the measures, of which the Cleveland Financial Stress Index shows best-in-class identification performance. In terms of forecasting performance, Kamakura's Troubled Company Index, Cleveland Financial Stress Index, and Goldman Sachs Financial Conditions Index show moderately stable usefulness metrics over time.
08.04.2015ISSN 2573-7953 WP 15-13DOI 10.26509/frbc-wp-201513
Keywords information value, systemic conditions, coincident measures, early warning, macroprudential policy
JEL Classification Codes G01, G18, G28, E32, E37

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Advisory

This article is based in whole or in part on the CFSI (Cleveland Financial Stress Indicator), an indicator that was discontinued by the Federal Reserve Bank of Cleveland in 2016 due to the discovery of errors in the indicator’s construction. These errors overestimated stress in the real estate and securitization markets. As a result, readers should be cautious and interpret any analysis based on CFSI data with those errors in mind.

Suggested Citation

Oet, Mikhail V., John Dooley, Dieter Gramlich, Peter Sarlin, and Stephen J. Ong. 2015. “Evaluating the Information Value for Measures of Systemic Conditions.” Federal Reserve Bank of Cleveland, Working Paper No. 15-13. https://doi.org/10.26509/frbc-wp-201513